It’s no secret that many companies are eyeing members of their affinity groups – that dream audience of customers, dealers, franchisees, suppliers, and employees already sold on the corporate story – as attractive potential shareholders.
However, selling stock to affinity groups has always been a ticklish business. Only companies with their own direct-purchase plans – specially-designed programs for selling a company’s stock directly to new and existing investors – are able to make overtures to them. And the SEC has a strict definition of what constitutes an affinity group: anyone who already has a relationship in writing with a company, explains Jim Volpe, vice president at First Chicago Trust Company in Jersey City, New Jersey.
For example, an electric utility has a written relationship with its customers through the monthly statements it sends. If that utility has a registered direct-purchase plan, it’s welcome to distribute fliers advertising the plan to its customers.
The plan must also be registered with the SEC in order to market to its affinity groups, says Volpe. About half the 330-plus direct-purchase plans operating in the US today are unregistered; none of those will have been able to publicize their programs to affinity groups. Registered plans that have successfully negotiated the regulatory hurdles and reached out to affinity groups report that the rewards of doing so are considerable.
Loyal Following
Charles Carlson, editor of the DRIP Investor, maintains that affinity groups are well worth wooing. Their members ‘are the people IROs want to have as shareholders,’ he says. ‘These are the people they want to build a relationship with.’
Transforming faithful customers into shareholders is not a new idea. When Boston Beer went public in November 1995, the company reserved a million shares for its customers, who received press releases about the IPO along with their six packs. ‘We wanted our customers to own the stock,’ says Alex Gregory, IR manager for the Boston-based brewer. Having reserved 33 shares for each of the first 30,000 investors, Boston Beer’s transfer agent had to return 108,000 of the 138,000 checks it received. Why the avalanche of would-be, beer-drinking investors? ‘We have a loyal following,’ says Gregory.
Established companies are marketing themselves to customers, as well. This spring, BellSouth began distributing ‘bill stuffer’ brochures to its customers and will have mailed out 13-15 mn fliers about its direct-purchase plan by year’s end, according to Mark Butterworth, IR chief for the Atlanta-based utility. So far, says Butterworth, ‘We’ve had a good response from people calling for a prospectus package.’
For Butterworth, the direct-purchase plan is more than a vehicle for attracting new investors. It’s a chance to cement relationships with existing customers. He maintains that ‘a customer who’s a shareholder is a loyal customer.’
Many IROs are as intrigued by the idea of growing the number of ties customers have to the company as they are by the possibility of attracting new investors. Boston Beer’s Gregory has no doubt that shareholders make good customers: ‘When I own stock in a consumer company, I think twice about buying a competitor’s product.’
Winn Watkins, who handles IR at JC Penney, goes a step further, suggesting that a customer/shareholder is primed to take a more proactive role in shaping the company’s future. He suggests that a shareholder will be more likely to point out a customer-service problem where other shoppers will keep mum. ‘As shareholders, they’re more apt to speak up,’ says Watkins.
Attracting Shareholders
Of course, an IR department approaching an affinity group has no guarantee of a warm reception; some registered plans have found only modest numbers of takers.
Early this year, Amoco mailed out letters informing roughly 9,500 franchisees about the Chicago-based company’s direct-purchase plan. Ken Kaminski, manager of shareholder services, felt that as ‘part of the Amoco family, franchisees would be interested in the plan.’
About 4 percent of the gas station owners did enroll, which Kaminski says is about average for such a solicitation. And Amoco is considering contacting other affinity groups – credit-card holders, for instance – in the future.
Houston Industries – a utilities holding company – has also marketed its direct-purchase plan to its 3.6 mn customers. The response? ‘It’s been good,’ says Robert Smith, assistant corporate secretary. ‘But it hasn’t been overwhelming.’
In general, Smith says, response rates are lower for utilities than for corporate superstars like McDonald’s or Walt Disney, which boast nifty investor give-aways. According to Smith, the average company can expect 3-12 percent of recipients to request information, with only a fraction of those requests yielding new investors.
Not all companies approach each and every member of their affinity groups. BellSouth, for instance, chose to send out notices to all residential and small business customers and to exclude larger businesses. Butterworth reasons it would be a waste of time to market to companies with 100 or more phone lines because the person opening the mail is unlikely to be responsible for investment decisions.
Registered plans also enjoy the freedom to place information about direct-purchase plans on the Internet and to publicize their plans by taking out tombstone ads, thereby reaching affinity and non-affinity groups alike. Currently, registered plans at Ameritech, Enova, Amoco, and the Equitable Companies are providing online access and prospectuses on Netstock Direct (www.netstockdirect.com), which also lists the names and toll-free numbers for all direct-purchase plans, whether they’re registered or not.
Rising Fees
Promoting a direct-purchase plan to affinity groups is not cheap. Boston Beer estimates that handling a single call for information costs the company $2.00-$2.50. And Kaminski says Amoco spends $1.00-$1.50 sending out each information kit, 55 cents of which is for postage alone.
The vast majority of plans, whether they’re unregistered like Boston Beer’s or registered like Amoco’s, avoid over-taxing IR staff with would-be shareholder requests by hiring outside bank transfer agents to administer their plans. Even after shareholders have signed on, they don’t cease to be an expense. According to Carlson, companies spend $12-$16 a year to service and send annual and quarterly reports to the average individual investor, whether he owns one share of stock or a thousand.
To offset these expenses, direct-purchase plans are currently charging three types of fees: one-time entry, per-transaction and, more rarely, annual fees. When determining fees, companies have a follow-the-leader mentality, using their competitors’ pricing models as a touchstone. As a result, says Carlson, utilities tend to have uniformly low fees, while consumer-products companies are generally more creative in their charges.
Fees for direct purchase plans vary substantially and have been steadily climbing. Boston Beer charges an initial fee of $10 and a transaction fee of 12 cents per share; subsequent investments are $5 plus 12 cents per share. Amoco requires a minimum investment of $450 and a first-time enrollment fee of $8.50, as well as a 5 percent service charge for each investment, up to a maximum of $3. Houston Industries has no enrollment fee but charges a transaction fee of 5 cents a share, according to Smith.
Carlson points out that companies with strong consumer brands face a unique challenge. ‘Every grandmother in the world wants to buy one share of Disney stock and frame it for her grandchild,’ he observes. Such gifts mean that high-profile companies bear the costs of servicing a very large body of very small investors.
Fees notwithstanding, for retail investors direct-purchase plans are a very economical alternative to brokers, who’ve understandably expressed mixed emotions toward direct-purchase plans. Although some brokers lament the lost business, Carlson contends investors in direct-purchase plans ‘are people who probably would never be in the financial markets in the first place.’
Nor, he says, have brokers been aggressively wooing Mom & Pop investors. It’s no wonder that small investors turn to direct purchase plans, says Carlson, given that ‘brokers fee them out of the market.’
International Scene
Over the last couple of years the concept of stakeholders has gained greater currency in the UK, where Mark Goyder, director of the Center for Tomorrow’s Company in London, urges leaders to take ‘an inclusive view of all the relationships that will make the company or break it.’
Goyder recalls that in January 1996, now-Prime Minister Tony Blair gave a speech in Singapore, in which he encouraged companies to view customers, local communities, employees and even other organizations as stakeholders in their enterprises.
Since that speech, Goyder has observed a sea change within UK companies, which are recognizing that shareholder value is not an end in itself so much as a byproduct of doing a good job. So far, however, Goyder has not seen this inclusiveness extend to approaching customers and inviting them to become shareholders. ‘UK companies have not gone very far in the direction of marketing their stock to their customers.’
Michael Waring, investor relations officer for BAA plc, formerly the British Airports Authority, emphasizes the importance of stakeholders, including business partners, employees, shareholders, and neighbors. But Waring acknowledges that his company’s IR effort still focuses almost exclusively on institutional investors.
Some overseas companies are offering stock directly to US investors through two depositary-sponsored plans: JP Morgan’s shareholder services program and a similar program through the Bank of New York. Since April 1996, retail investors have had the opportunity to make investments in the American Depositary Receipts (ADRs) of Morgan’s overseas clients, according to Joan Goldstein, a vice president at Morgan. Individuals who want to invest in any of 64 different foreign issues, including Sony, Barclays Bank, Benetton Group, and the Guangshen Railway Company in China, can do so through Morgan’s SSP.
Naturally, companies with unregistered direct-purchase plans are eager to gain the same access to affinity groups that registered plans currently enjoy. Their numbers exploded after the SEC issued a no-action letter in December 1994, permitting companies to use bank transfer agents following an off-the-shelf, SEC-approved blueprint for creating direct-purchase plans. But companies were prohibited from publicizing these unregistered, bank-sponsored plans.
The Securities Transfer Association (STA) has asked the SEC for a no-action letter to grant bank-sponsored plans an equal opportunity to market to affinity groups, according to Charles Rossi, STA president and executive VP at Boston EquiServe.
Rossi says the long-awaited no-action letter is likely to allow bank-sponsored plans to disseminate information to affinity groups, place information about direct purchase plans on the Internet, and announce the existence of their plans in tombstone advertisements – just as registered plans do today.
The SEC declined to comment because the matter is still pending. But some industry observers say that if the Commission does grant no-action relief to the bank-sponsored plans, the number of new direct-purchase plans will skyrocket.
Volpe is convinced that many companies unwilling to spend the time and money to register with the SEC would launch bank-sponsored plans if the marketing prohibition gets lifted. In fact, he predicts that there would be at least 2,500-3,000 new direct-purchase plans within the 18 months following the no-action letter, with many of these newcomers ready to contact their affinity groups right from the start.
A Prospectus & Burger To Go?
One important kind of relief that the SEC might also grant under the coveted no-action letter is the ability to include cash customers as part of their affinity groups.
‘Right now,’ explains Volpe, ‘you discriminate between customers with whom you have a relationship in writing, and someone with whom you don’t have a relationship in writing.’ Although regulators are reluctant to let companies plug their own stock too blatantly, Volpe contends that there’s no reason a cash customer at McDonald’s shouldn’t receive information about the company’s direct-purchase program.
According to Carlson of the DRIP Investor, the current restriction against marketing to cash customers presents a formidable obstacle for many consumer companies. ‘McDonald’s would probably want to market more aggressively to customers, but it doesn’t have a written relationship with them,’ he says.
If this rule was changed, consumer franchises like McDonald’s and Sears Roebuck might someday display prospectuses on their counters for customers to peruse as they munch on fries or purchase a pair of socks. Given the explosive growth in the number of individual investors in the US, Houston Industries’ Smith believes it’s only a matter of time before companies are allowed to promote their shares openly to their affinity groups. To illustrate what the future might bring, Smith points to the mutual fund industry. Individuals ‘can now clip a coupon in the newspaper, mail it in, and be enrolled in a mutual fund. I don’t think direct-purchase plans are much behind,’ he suggests. ‘Give it ten years.’
